2017 Tax Reform Preserved Student Loan Interest Deduction, Made Discharges Tax-Free

A tweet from The Wall Street Journal highlighted that President Trump’s "big tax-and-spending law" included "new restrictions on how much students can borrow and how they repay," prompting a closer look at the actual legislative changes. While the Tax Cuts and Jobs Act of 2017 (TCJA) significantly reformed the U.S. tax code, its direct impact on federal student loan borrowing limits and repayment structures was minimal, primarily affecting the tax treatment of education-related expenses and loan discharges.

The Tax Cuts and Jobs Act, signed into law in December 2017, represented the most substantial overhaul of the U.S. tax system in decades. Its primary goals were to reduce corporate and individual income taxes, simplify the tax code, and stimulate economic growth. While initial discussions surrounding the bill included proposals that could have negatively impacted student loan borrowers, many of these were ultimately not enacted.

Among the key provisions that did pass, the TCJA notably made student loan debt discharged due to death or permanent disability tax-free. Prior to this, such discharges could be considered taxable income, creating a significant financial burden for affected individuals or their estates. This change provided a substantial benefit to borrowers facing tragic circumstances.

Contrary to some initial concerns and the Wall Street Journal's tweet, the TCJA preserved the student loan interest deduction, allowing eligible taxpayers to continue deducting up to $2,500 in student loan interest annually. Furthermore, the law maintained the tax exclusion for employer-provided educational assistance, allowing employees to receive up to $5,250 in tax-free educational benefits from their employers.

Overall, the 2017 tax reform's influence on student loans was more nuanced than imposing direct "restrictions" on borrowing capacity or repayment plans. Federal student loan limits and the structure of income-driven repayment plans remained largely under the purview of the Department of Education's policies, separate from the primary tax legislation. The TCJA's actual effects were largely beneficial or neutral for student loan borrowers, particularly regarding the tax implications of certain loan discharges.